Mindset explains: the impact of the U.S. elections on the technology and venture capital markets
One president, trillions of dollars
Every four years, the U.S presidential elections are closely watched and debated worldwide. The results are about more than just their direct impact on Americans, given the economic influence of the United States on the global economy. This subject has never been so intensively discussed across the globe as in the 2020 election, with a huge polarity between the two candidates that could generate dramatically different impacts on the world’s economy and society. Joe Biden has been declared the winner, subject to confirmation by Congress and pending litigation from the Trump administration. Assuming this result is confirmed, how will a Biden presidency influence the technology and venture capital sector?
Tech companies enjoy predictability
One of the most remarkable characteristics of the Trump administration was a focus on certain extreme policies that catered to his base of conservative supporters, ranging from building a wall between the U.S. and Mexico to restricting the entrance of immigrants (notably from Muslim countries) to engaging in a tariff war with China. As a result, Trump attracted both lovers and haters across the world, with very few remaining in between. During his administration, both good and bad consequences emerged from these polemic policies.
Among the good ones it is worth noting the behavior of the equities market. It’s undeniable that the American stock market behaved more positively than expected during Trump Administration, whether this was a direct result of his policies or a legacy from the prior Obama administration. Despite other industries being hit hard by the COVID-19 pandemic, technology has been one of the fastest growing segments, as sales of computers, software and other tech-related products were boosted by the quarantining, social distancing and working from home that was implemented on a global scale.
A few weeks before the elections, the stock market showed an even more positive behavior due to a simple reason: risky assets perform better among certainty. Despite Trump’s continued dispute of the election results, once Biden was declared a winner by most sources it decreased the market uncertainty. Biden’s victory was positively received by the venture capital market and for Big Tech companies’ investors, and in fact Democrats received 79% of the funds contributed by the venture capital industry during the campaign. The new president’s measures are seen as less extreme and more predictable, combined with the fact that the Congress is divided between a Republican majority in the Senate and a democratic majority in the House, preventing the risk of the new administration passing measures that could negatively affect tech companies if both were Democrat-controlled. In other words, Biden will face difficulty in approving some of the regulatory actions that he planned against the FAAMG (Facebook, Amazon, Apple, Microsoft and Google) companies, once again diminishing part of the uncertainty and risk that could potentially affect the tech industry in the next few years.
Taxation may be the Achilles’ heel
One subject in particular deserves special attention due to the direct impact it could have on virtually any company, but that could have a significant effect specially on tech companies: taxes.
During his four years in office, Donald Trump approved tax policies that had both positive and negative implications for the Big Tech companies, most notably with the reduction of the corporate tax. Until 2016, the corporate tax for American companies was equivalent to 35% of profits, but the Big Techs have always been able to efficiently take advantage of accounting benefits to reduce the total amount of tax owed. In 2016, for example, Apple, Microsoft, Alphabet, Amazon, Facebook and Netflix together reported an average effective tax rate of 24.0%. In 2017, Trump managed to slash the corporate tax to 21%, and Big Tech firms were among the biggest beneficiaries of this movement, having reported an effective tax rate of 14.5% in 2019, less than half of the 35% benchmark in 2016.
One of the major concerns of investors in Big Tech stocks was Biden’s plan to increase the corporate tax, raising the average corporate tax to 28% and setting a minimum tax of 15% on companies’ booked income or reported profits.
But the proposed tax changes don’t end here. The Big Tech companies naturally benefitted with Trump’s decision to exempt U.S. multinationals from paying taxes on profits generated in other countries, unless these profits were repatriated, which generated a long conflict with several European countries, particularly France. With that, companies such as Apple and Microsoft kept over 90% of their cash assets in foreign holdings, significantly reducing their total effective tax owed. Joe Biden is considering reverting such benefit, targeting offshore companies with a 10% penalty surtax on profits earned from selling products and services back to the United States.
The venture capital world and smaller tech startups may also be affected if these measures come into force. While public tech companies may have their earnings-per-share reduced by more than 7% on average according to Protocol, firms with annual gross revenues of approximately US $1.5 million are estimated to face an increase of nearly 45% on their tax burden.
Another proposed measure that may have an even greater effect on the venture capital market is the adjustment of the capital gains tax rate from 20% to 39.6% for those making more than US $1 million, which would completely eliminate one of the greatest benefits that investors of venture capital and other alternative assets have when investing in these modalities. This may significantly decrease the amount of capital available in the market for venture capital, as the benefits of investing will be less lucrative from a tax perspective. It’s important to remark that not all investors would be affected, since non-US investors and several categories of U.S. investors are tax exempt (such as pension plans, private foundations and charitable trusts), but GPs will hardly be able to work around this problem in case this tax adjustment is made.
Despite the potentially negative direct impact that these proposed policies from the Biden administration may have over tech companies, the fact that the Congress is currently divided is a balance to this risk, reducing the likelihood that taxes are increased in the short-term. A democratic majority in the Congress would certainly lead to an immediate approval of these adjustments, and this could happen during the next congressional elections in two years.
Tech restrictions once again
Despite so many discrepancies between the Democrats and the Republicans, they all share one common goal: better regulating social media. Although certain differences in the way with each side of the aisle plans to do this, Biden doesn’t seem to be against Trump’s proposed changes on the Section 230 of the Communication Decency Act, which exempts social media companies from any lawsuit over the content published by their users.
Another Biden platform regarding tech companies is the concern over biases present in AI, which often magnify stereotypes and negatively affect protected groups. He made it clear that he would promote greater algorithm transparency in crucial areas such as criminal justice, employment, education, and other fields. In line with that, Biden also wants to put tougher limits on facial recognition and other surveillance technologies used by law enforcement officials across America.
Although Democrats and Republicans share somewhat similar opinions about whether the technology segment should be better regulated, they have very different views on immigration.
Trump significantly restricted immigration and immigrant benefits in the U.S., ranging from dramatically increasing the minimum required salary of an immigrant to qualify for an H1-B visa to suspending the issuance of green cards. Biden’s approach to this topic is the opposite, with several proposed actions to better absorb immigrants and promote workforce diversity. The Biden approach will have a positive impact in the tech and venture capital market as a whole, where immigrants make up a large portion of the workforce. For example, more than half of the unicorn companies (those valued over US $1 billion) in the U.S. had at least one immigrant founder, and a quarter of them immigrated to the U.S. as international students. The employees of tech startups, especially engineering teams, are often made up of immigrant talent from around the world, who move to Silicon Valley and the U.S. to work with the best of the best in their field.
One of Biden’s proposals is to provide more support for workers in the gig economy at companies such as Uber, many of whom are immigrants. These workers are usually classified as independent contractors and do not receive benefits such as health insurance or paid leave.
Climate change and agribusiness also got a place
The issue of climate change and the environment is a subject that generated a lot of controversy during the past few years. Trump was harshly criticized for actions such as withdrawing from Paris Climate Agreement, dismantling the Clean Power Plan, and rolling back rules that limit the pollution created by Oil & Gas infrastructure, but did not link these actions directly to opportunities in the tech industry. In contrast, Biden proposed re-joining the Paris Climate Agreement immediately and outlined a US $2 trillion plan to fight climate change, with benefits for power generation companies willing to switch to carbon-free sources, auto-makers willing to produce more electric cars, and buildings willing to upgrade to become more energy efficient.
In addition, Biden also proposed cutting subsidies for fossil fuels and indicated that US $400 billion would be invested in more efficient and cheaper batteries, in addition to US $300 billion invested in cleaner power plants. This attention to, and funding for, environmental matters can clearly have a positive direct influence on startups associated with the agribusiness segment, as the amount of companies related to agriculture and environmental impact has been increasing year after year. Brazil has already started planning to resume more intense conversations with the U.S. on ag-related subjects,
Biden stated in his rural plan, among other benefits, that the government would provide capital for small-medium manufacturers so they can modernize and compete, and would also quadruple funding for the Manufacturing Extension Partnership. So far, some solutions provided by agtech companies may not be financially viable for small and medium producers. However, if this plan is put in practice, it’s possible that the demand for agtech solutions will increase. In addition, the new president’s plan to invest US $20 billion into the expansion of 5G technology in rural areas could also significantly increase the adoption of new technology in the countryside.
Venture capital got to the White House
A few days after the election’s results, Joe Biden announced his new chief of staff: Ron Klain. During Obama’s administration, Klain was Biden’s chief of staff for several years, then left the position in 2011 to join venture capital firm Revolution, which was co-founded by AOL founder Steve Case. Klain then worked as a VC for nearly a decade before re-joining Biden this year, so the industry now has one of it’s own in the White House.
All in all, it seems the combination of a more predictable president and a divided Congress is favorable to BigTech companies, startups and venture capitalists as a whole. Biden’s proposals related to investing in the environment and opening immigration have a reasonable chance of materializing, while the ones that may harm the industry (such as tax increases) may have a smaller chance of becoming reality. Overall, this bodes well for the investment community. President-elect Biden seems more concerned than the previous president with matters that have a direct influence on the technology and venture capital markets, keeping this as a U.S. competitive advantage. We expect to see the technology industry continue to thrive and evolve under the Biden administration.